Take Advantage of a Tax-Free Savings Account

We all know that saving is beneficial, but it always hurts when you have to pay the tax man his share. One way to legitimately avoid doing so is through a tax-free savings account.

Travis McClure CFP®

Travis McClure CFP®

Executive Director and Private Wealth Manager

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Take Advantage of a Tax-Free Savings Account

Why this could be a good place to stash your cash?

South Africans are notoriously bad savers. Our household savings rate is currently -0.1% (according to Trading Economics) which means we’re spending more than we earn. In other words, we’re generally living beyond our means and aren’t really saving. This is obviously problematic. In an economy where job security is far from certain, we can’t afford to have nothing squirreled away for a rainy day or a child’s education.

That’s why the government introduced the Tax-Free Savings Account (TFSA) in 2015: to encourage South Africans to save more. This savings vehicle provides significant tax relief to savers and is especially beneficial for young people looking for somewhere to park their money for the long term.

Here is your complete guide to Tax-Free Savings Accounts

What is a TFSA?

It’s an account that doesn’t attract any income tax. You can use your TFSA to invest in shares or bonds. If you earn interest, dividends or capital gains on these investments, you won’t be liable to pay tax on any of this income.

What’s the catch?

It almost sounds too good to be true: finally, a way to set aside your hard-earned cash without having to hand some of it over to the tax man!

Unfortunately, certain restrictions apply. You can only invest a maximum of R3000 per month, R36,000 per tax year and R500,000 over your lifetime. You can make withdrawals at any time with no tax implications but given the lifetime limit, you can’t replace these withdrawals. Any amount invested above the limits will be subject to a tax rate of 40%.

Who will benefit the most from a TFSA?

While a TFSA is beneficial for most investors, those with a long-term view are likely to reap the greatest rewards. By putting your money away for a significant period of time, you can multiply the returns of your investment through the compounding effect (essentially this is when you earn interest on interest).

The South African Savings Institute provides the following practical illustration of the long-term benefits of a TFSA.

“If a 25-year-old invested R30,000 each year in an interest-bearing bank account, by the age of 65 they would have just more than R1.5 million after tax. In comparison, a tax-free savings account with the same interest rate would be worth R2.7milion, because no tax is payable.”

Where can I sign up?

TFSA investments are available at banks, long-term insurers and government (in the form of a retail savings bonds scheme). We advise you to shop around before settling on a TFSA provider as there can be substantial differences in fees charged; obviously the lower the fees the better.

To find out how we can help you set up a TFSA please get in touch with us.

Take advantage of tax-free savings

It’s easy to get caught up in South Africa’s spending culture – after all, spending requires far less discipline than saving does. But being able to save tax-free is an attractive incentive and one which savers should seriously consider as part of their long-term savings plan. As the tax year draws to a close, take advantage of the benefits of a TFSA before the end of February 2021 deadline. 

If you found this article useful you may be interested in our some of our other #Knowledge articles.

#Knowledgeintowealth #Taxfreesavings

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